Irish banks, bonds hit as EU eyes survival plan

Shares in Ireland's three listed banks began Monday at record lows and kept sliding. Allied Irish Banks fell more than 3 percent to below euro0.26, Bank of Ireland 14 percent to below euro0.37, and Irish Life & Permanent 19 percent to euro0.85. All three shares regained some or all losses in afternoon trade.

Bank of Ireland and Allied Irish have received billions in state aid to cover their dud loans to bankrupt construction tycoons, while Irish Life & Permanent has received no bailout help but is most exposed to Ireland's depressed market for residential property.

Traders said a widely read article in the Irish Times by University College Dublin economics Professor Morgan Kelly - known in Ireland as "Dr. Doom" because of his accurate forecasts of the death of the Celtic Tiger economy - added to the gloom.

Kelly forecast that state support for banks would cost taxpayers an extra euro30 billion beyond the euro45 billion to euro50 billion declared last month by Lenihan. He accused the government of maintaining "a dreary and mendacious charade" on the true scale of property-based losses in the pipeline.

Kelly called the current deficit-fighting push "an exercise in futility" and rated Ireland's financial fate alongside that of the Titanic. He said there was no point trying to cut billions from the budget "when the iceberg of bank losses is going to sink us anyway."

"We are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers," Kelly concluded.

The government last month stopped trying to sell new bonds because of the punitive interest rates demanded by investors at the last auction in September.

Lenihan stresses that Ireland has sufficient funds to pay its bills through April and also could tap its pension reserve fund. Nonetheless, the government is gambling that investors will be sufficiently reassured to buy new Irish bond issues paying lower yields by February at the latest.

As the traditional owners of Irish treasuries - chiefly banks in Britain, Germany, the United States and France - seek to dump them because of their falling value and increased perceived risk, new sellers can be attracted only by offering higher yields.

Traders say the main buyer of Irish bonds in recent weeks has been the European Central Bank.

The Frankfurt-based central bank confirmed Monday it bought euro711 million ($988 million) of euro-zone countries' bonds last week. It declined to specify how much of that figure involved Irish treasuries.

The cost of insuring Irish debt on the world's credit-default markets also rose to new heights Monday.

Credit data agency CMA said contracts to insure Ireland's debt against default jumped to 610 points from Friday's record close of 578 points. This means it now costs euro610,000 to insure against a default of euro10 million in Irish debt over the next five years.

Buyers of the derivatives, called credit-default swaps, are betting that Ireland will be ordered to renegotiate debts with bondholders as part of a future EU-IMF rescue package.